Oakland, CA — Today at ICA we are thrilled to announce our brand new investment structure: the ICA Impact Note. This new note unleashes our ability to invest for financial justice in the Bay Area. And what’s more—we’ve designed the note to be open-source and free to use by other investors in our field.
What is the ICA Impact Note?
The new ICA Impact Note is an innovative investment structure that helps entrepreneurs prioritize social impacts–like good jobs, workforce diversity, and employee wealth creation–as they grow their businesses. Many founders set out with a vision to create change in their community through their business, but may feel pressure to shift their focus while growing and fundraising in a competitive landscape. When a company receives investment through the ICA Impact Note, the business defines the measurable social impact they want to create. As companies meet these impact milestones, the investor returns equity ownership percentages back to the company.
Shifting the investor-investee relationship
Through this structure, the investor and the company are able to work in long-term partnership to create social returns for the community by growing local businesses. The design of this note builds off of ICA’s 10 years of experience deploying capital for community-minded growth-stage businesses and is free to use by other investors working to prioritize social impact.
“This is the much needed innovation our industry needs: we’re contributing to a future where women entrepreneurs and founders of color have the capital, connections, and coaching they need to transform their communities through attainable wealth building.” -Dianna Tremblay, Chief Program Officer
How do entrepreneurs access ICA capital?
At ICA, we’re on a mission to invest in and accelerate great businesses to close the gender and racial wealth gaps. To do this, we are always on the lookout for promising businesses that are positioned to grow social impact and profit. The main way ICA finds companies to invest in, is through our accelerator programs designed for both established and emerging companies. Learn more:
The ICA Impact Note is live!
We’ve just made the first two investments with the ICA Impact Note, funding two Bay Area, Black-owned businesses: ElectroSpit and Pietisserie. We’ll be making all our investments using this unique note moving forward.
The Deep Dive: How the ICA Impact Note Works
What we mean by impact
The “impact” in impact investing can cover a wide variety of issues: from broad efforts to improve the environment to specific issues like prison reform. At ICA, our work starts with our mission to close the racial and gender wealth gaps. That’s why every investment is structured to deliver social returns for the community by growing great businesses.
There are five social impact milestones in the Impact Note, tailored for each company depending on their focus and stage of growth:
- Job creation
- Health and retirement benefits
- Equity ownership for workers
- Profit distribution
- Workforce diversity
How the incentive structure works
We designed the incentive structure for founders by adjusting the valuation cap and discount instead of using an interest rate. A 25% to 50% increase in the change to the valuation cap can result in a significant amount of equity retained by the company. As each of these impact milestones are met, the valuation cap and discount are adjusted by a predetermined amount, shifting financial returns for the investor into social returns for the community.
“What’s really unique about the ICA Impact Note is that it is designed to create wealth for all parties by investing in the right companies at the right time, and building pathways for that wealth to be shared with the founder and employees through the achievement of these milestones, rather than extracted by outside investors.” -Yui Ueno, Sr. Director of Investment
Patient, predictable, and transparent liquidity
Seed stage equity investments typically have a 7-10 year waiting period before the investor sees a liquidity event, in other words, any cash return. Our industry has experimented with ways to create earlier liquidity for investors, such as revenue-share payments before conversion. These solutions generate cash for investors, but reduce operating margins for the entrepreneur and take valuable growth capital out of the company at an early stage—when cash is needed most.
The ICA Impact Note is designed to address this liquidity issue by providing founders patient capital at 0% interest and no fixed maturity date, that converts to direct equity in the business. The Note also includes a call option for investors that is exercisable after a predetermined period of time (at least 5 years for ICA), whereby the Note is repaid at no premium/multiple, 0% interest rate, and repayment happens over a predetermined number of months (up to 24 months). This provides a liquidity option for investors, while remaining patient, predictable, and transparent for founders:
- Patient: the option is only exercisable after a predetermined period of time
- Predictable: The repayment happens over a predetermined number of months
- Transparent: These terms are negotiated ahead of time and clearly outlined in the Note
By giving investors an option for liquidity, the ICA Impact Note provides mission-focused investors with much-needed flexibility. The Impact Note is designed to convert into a long-term equity investment, with the goal of reaching a more traditional liquidity event that generates many multiples of the initial investment returned, in addition to generating outside social return on investment.
“The objective of the call option is not to generate returns on capital—there is no interest rate or premium—but to provide investors the ability to mitigate risk on the initially invested capital. This allows investors to deploy capital in early stage companies where the exit risk is typically deemed too high. This means funds like ICA can keep investing in small businesses that are typically overlooked by conventional financing sources, and allow underrepresented, undercapitalized founders in Oakland and the Bay Area to grow and flourish.” -John Gough, Chief Investment Officer
The ICA Impact Note is open-source and ready for use
ICA’s Impact Note is available for use across the investing landscape, and is designed to be fully customizable for varied social impact goals and expected financial returns. The Impact Note allows users to adjust all quantitative aspects of financial and impact metrics to meet their preferred criteria including:
- Valuation cap
- Period of time before call option may be executed
- Period of time of amortization in the event call option is executed
- Incentive structure based on social impact
- Social impact metrics (e.g. number of jobs, % of profits to be shared with employees, diversity of management/Board metrics, etc.)
“At ICA our impact is focused on Bay Area founders. But our work amplifies far beyond our region. What we’re creating is a credible model that can work in other places. Our goal is to influence the financial system to use more creative and flexible products to address the gender and racial wealth gaps. We want investors using this note, which is why we’ve designed it to be open-source and shareable.” -Allison Kelly, CEO
Currently the ICA Impact Note is available for use by select investors and CDFI organizations, and we plan to release it publicly later this year. If you’re interested in working with us to implement the ICA Impact Note in your portfolio, please contact us.